The ATO claims some trusts are misrepresenting the purpose of their property developments. Photo: Photo: Glenn Hunt

Several hundred commercial and residential developers are using special-purpose trusts to claim that the proceeds from developments are capital gains, rather than income, so they are eligible for a 50 per cent capital gains discount.

A Tax Office spokesman told Business Day that the agency was looking to claw back up to $200 million in revenue from developers that had wrongly claimed the concessions and reduced their tax bills.

At the heart of the ATO’s concerns are trusts that are claiming that properties are being developed to earn a rental income, when their true purpose is turning over property for sale, meaning that any profit should be classified as income, rather than a capital gain.

The alert issued by the ATO says telltale signs that trusts may be trying to make wrongful claims include finance arrangements that indicate the property is to be sold within a certain time frame; communication with local councils that indicate sales plans, or the involvement of real-estate agents in the development with activity, including off-the-plan sales marketing.

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“The exact scale of these arrangements is difficult to quantify, but the amount of revenue receipts that we believe to have been mischaracterised as capital gains involved in recent and current cases is $40 million in underpaid tax,” the spokesman said.

“As a result of analysis of external data about property transactions, and from ATO data from tax returns, we believe that the revenue at risk is likely to be between $100 million and $200 million, noting that entities involved in these arrangements may be subject to amendments for up to four years, in the majority of cases.”

He said the ATO had identified several hundred entities that may be involved in such arrangements. It would be contacting some of these and starting audits on higher-risk arrangements.

ATO deputy commissioner Tim Dyce said the office had already raised millions of dollars in adjustments from people who had exploited the system. “Our current compliance activity shows we are likely to make many more adjustments in the coming months,” he said.

“We have begun auditing property developers who are carrying out activities which conflict with their stated purpose of capital investment.”

Mr Dyce said the Tax Office had found such arrangements were contrived, and that some property developers were inappropriately claiming capital gains tax concessions, which can incur penalties of up to 75 per cent of the amount of tax avoided.

“Property developers should return the income from developments to ensure they are complying with the law,” Mr Dyce said.

Developers that have entered into such arrangements could make a voluntary disclosure to the Tax Office, which would reduce potential penalties.

“We encourage entities who are involved in such arrangements to lodge a voluntary disclosure or, if unsure, to lodge a private ruling application to clarify their situation,” he said.

Capital gains tax breaks are one of the biggest drains on the federal budget.